A Wall Street analyst is telling investors to sell shares of Apple Inc. one week ahead of the company’s expected unveiling of its latest iPhone, saying a downgrade is likely unless the company massively exceeds expectations at the event.

UPDATE: Shares closed down 4.2% at $98.94, the second-worst day of the year. The stock fell below $100 for the first time since Aug. 20. The decline shed about $26 billion in market capitalization for Apple, just short of Netflix Inc.’s total market value. The drop comes after Apple shares surged 38% since the company’s quarterly report in late April, when results surpassed expectations and the company unveiled a 7-for-1 stock split.

Wednesday’s drop comes after Apple denied that its online systems had been breached by a hacker, deepening the mystery of how private photos of celebrities leaked onto the Internet. Apple said certain celebrity accounts were compromised by “a very targeted attack on user names, passwords and security questions.”

A combination of those lofty expectations and the stock’s huge rally in recent months is what makes Mr. Hargreaves of Pacific Crest nervous. He says new iPhones will boost results in the short term, but overall iPhone volumes are likely to fall in late 2015 and 2016. “This leaves limited room for upside to the stock, in our view, unless Apple launches new products that can generate billions of dollars of incremental operating profit,” he said.

Still, Mr. Hargreaves caveats himself by saying investors should still hold some Apple shares through next week’s event. In conjunction with new iPhones, Apple is expected to show a wearable device that many have been calling an iWatch. It could also launch a new payment partnership, according to Mr. Hargreaves.

“Based on the work we have done, we do not expect either new segment to drive incremental profits that are meaningful at Apple’s scale in the near to medium term,” he said. “However, we are open to being wrong on this and believe investor confidence in the iPhone 6 cycle will support the stock through the coming event. Consequently, we recommend holding some position in Apple through the Sept. 9 event in the hope of getting clarifying detail on the profit potential of new products and services.”

Even so, Mr. Hargreaves stressed that the stock may not have much more room to run from current levels. “The majority of potential upside from iPhone 6 is priced into the shares,” he said.